The EFT Basics: Processor, Network, Gateway

Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.

Debit Card Decisions – Knowing what to do and which vendors to select can be very confusing, if not impossible.

Vendors, when contacted by financial institutions about making an EFT-Debit Card decision will immediately back the truck up on the inquiring institution with all sorts of hard to understand lingo, acronyms and buzzwords. Then, everybody runs for cover because it is too hard to understand and too complicated. Some will throw up their arms and tell the vendor just give me your best deal. If you do this, you’re toast already.

This is the first blog of a three-part series, that will address the Debit Card transaction basics.

The Processor, the Network and the Gateway.

As you begin to dig into the Debit Card world, the three most commonly used words outside of Fraud and Interchange are: Processor, Network and Gateway.

To set the stage, this article will focus on the needs of an exempt community financial institution as defined in Regulation II (aka the Durbin Amendment found in the Dodd-Frank legislation). That is, institutions that have total assets less than 10 Billion.

The Processor

A processor is defined as the vendor that performs two key functions. First, they receive the debit card transactions generated by your card holder routed to your Network or association that your institution is a member of. The processor then posts the transaction to your card holder’s account. So, in simple terms, the processor is your core application provider.

Note: Your Bank Identification Number (BIN) on the card (usually the first six numbers) is published for all merchants, acquirers, and networks to use as they route your transactions back to your institution.

The second key function is to provide online verification for your card holders. The verification access is via a real-time interface that allows Networks the ability to query your cardholder’s account to verify that funds are in the account. A good example of this type of inquiry would be a cash withdrawal at an ATM or a Pinned Debit transaction at a point of sale (POS). Is the money there and is it available? Merchants love this form of verification because it reduces their risk. This is also referred to as an online transition because the amount of the transaction is taken out of the available balance of the account immediately.

Processors also receive and post offline transactions. These transactions are not verified in advance using a real-time interface. Offline transactions that come are two-parts. Part one, the merchant verifies the card and sends a memo-post transaction amount to hold a dollar amount on the account. Later, the transaction actual value is transmitted to the processor for hard posting and the memo-post amount drops off. These transactions are commonly referred to as Signature Transactions, that generate the highest interchange revenue and are routed to the institution using Card Association Brand (Mastercard, Discover Visa) and processed via the credit card payment system rails. Offline transactions pay higher interchange because the interchange is calculated on the dollar value of the transaction, but they also represent higher cost and risk to the merchant because the money may not be there at the time of hard-posting.

Network

There are two types of Networks. The first pertains to the Card Association Network that can route a card holder transaction via the credit card rails to your financial institution’s processor and the second is a Debit Card Network.

Card Association Network could be American Express, Discover, Mastercard or VISA. All financial institutions issue debit cards to their customers or members. Depending on the Card Association Network that an institution joins, the brand will just about guarantee that the card will be accepted by merchant where used for offline and online transactions.

The Debit Card Network pertains primarily to Online transactions (PIN Network). These networks include: Accel, AFFN, Jeanie, Shazam, Presto, CO-OP, Star, NYCE, Presto, Pulse, just to mention a few. The Card Brand networks also have a presence in the space with their networks Mastercard has Maestro (POS) and Cirrus, (ATM) Visa has Interlink (POS) & Plus (ATM).

It should also be noted that Fiserv owns First Data, Star, Accel & MoneyPass. Fidelity (FIS) owns WorldPay, Jeanie, and NYCE. Both of these companies are also core application processors.

Networks represent an important component of the debit card space but joining the wrong network can cost your organization debit card portfolio profitability. Study and know your Network Operating Rules. Interchange on a PIN Network is calculated not on the dollar amount of the transaction, but the “type” of transaction. In addition, we find that PINLess Debit transaction interchange is about half of the interchange earned from a pinned transaction. This is something you really need to take a look at before you execute a network agreement with a processor. The negative income impact can be huge.

Gateway

Not all networks can route your debit card transactions directly to you, thus they employ the services of a gateway. A gateway operates as a transaction clearing house and are used mainly by Merchants and their acquirers. Their network may not have a relationship with perhaps AFFN or Presto, but they may have a relationship with a gateway that does. So, if a Presto transaction comes in via their network, your processor Network will receive the transaction through the Gateway! The Transaction will clear, and your institution will settle the transaction for your cardholder.